New Delhi: In what should come as relief to companies such as Vodafone Group Plc, a high-level panel appointed by the government has opined that ideally taxes should not be levied retrospectively.

If indeed the government does choose to impose them retrospectively, it should not claim either interest or penalty, the draft report of the panel said. The Union government had introduced a retrospective amendment to claim a tax demand of around Rs.20,000 crore, including a basic tax of Rs.7,900 crore, an equivalent penalty, and interest of around Rs.4,300 crore for a similar transaction in which Vodafone made a domestic acquisition.

The committee set up under Parthasarathi Shome, a former adviser to the finance minister, also provided a major reprieve for foreign institutional investors (FIIs) and private equity (PE) investors. The panel has recommended that in cases where FIIs and PE investors have a less than controlling stake through indirect investment, they should not be hit by the indirect transfer rule. This will protect investments made through participatory notes and those made by limited investors in a PE fund.

The draft report has been put up for public discussion, awaiting comments till 19 October.

The findings of the report, if accepted, will give the government an opportunity to reverse a change made in the Union budget and also strike a middle ground in the tax dispute with Vodafone.

The recommendations holds out the hope of clarity, and possibly tax relief, on more than a dozen transactions, including the Vodafone acquisition of Hutchison Telecom’s holding in its Indian arm Hutchison Essar (now Vodafone India Ltd). The government has already indicated that it may consider waiving the interest and penalty, through a circular, for cases that fall under the tax net after the retrospective amendments.

Similarly, in line with the recommendations of the standing committee on finance on the Direct Taxes Code Bill, the draft suggests that transfer of listed securities should be exempt from the tax net and also advocates greater clarity on the definition of “substantial assets”.

A capital asset will be considered as situated in India “if the share or interest derives, directly or indirectly, its value from the assets located in India being more than 50% of the global assets of such company or entity”, the committee suggested.

In a subtle criticism of the tax provisions in this year’s budget, the Shome committee pointed out that the amendments are not clarificatory in nature and, instead, widen the tax base.

The panel said retrospective application of tax law should occur in “exceptional or rarest of rare cases”. It also said that the tax withholder cannot be considered an assessee in default.

“The committee has made a bold recommendation that the government should use its constitutional powers to amend tax laws retrospectively only in the rarest of rare cases,” said Sudhir Kapadia, national tax leader at audit and consulting firm Ernst and Young. “It has clearly said that the government cannot penalize the tax withholder as it would have been impossible for him to withhold taxes when there were no laws that required him to do so. Likewise, the income earner should not be penalized with interest and penalties on back taxes leviable.”

The government, in this year’s budget, introduced retrospective amendments giving the tax department powers to tax the indirect transfer of shares when the underlying assets are located in India. The budget also put in place a validation clause that sought to override court rulings.

This was to counter the apex court judgement in January in favour of Vodafone that said the tax department did not have the right to tax the $11.08 billion Vodafone-Hutchison deal.

The tax department estimated the phone company’s tax liability at more than Rs.11,000 crore. Vodafone and the Indian tax authorities went to court to resolve the issue.

Vodafone did not respond to an email seeking comment.

“If the government charges interest and penalty on transactions conducted before the changes were brought about in the Finance Act, 2012, the assessee can easily get relief from courts. The company can argue that these laws were not in place when the transaction was done,” said B.M. Singh, a former chairman of the Central Board of Direct Taxes.